By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) -Tariffs will weigh on euro zone economic growth and prices for years, but there is little risk of inflation falling too low, and even the euro’s surge against the dollar is not a major worry, European Central Bank Vice President Luis de Guindos said.
The ECB signalled a pause in policy easing this month despite projections showing price growth dipping below its 2% target temporarily on the strong euro and low oil prices, reviving worries that the ultra-low inflation environment of the pre-pandemic decade could return.
But de Guindos played down those fears, arguing that the ECB was finally within striking distance of its target after years of under- and overshooting.
“The risk of undershooting is very limited in my view,” de Guindos told Reuters in an interview. “Our assessment is that risks for inflation are balanced.”
A key reason why inflation will rebound to target after dipping to 1.4% in the first quarter of 2026 is that the labour market remains tight and unions will keep demanding healthy increases, keeping compensation growth at 3%, de Guindos argued.
While de Guindos did not explicitly argue for a pause in policy easing, he said that financial investors, who now bet on just one more interest rate cut, possibly towards the end of the year, correctly interpreted ECB President Christine Lagarde’s message.
“Markets have understood perfectly well what the President said about being in a good position,” he said. “I think that markets believe and discount that we are very close to our target of sustainable 2% inflation over the medium term.”
The euro has risen by 11% against the dollar in the past three months, hitting its highest level in almost four years at $1.1632 on Thursday.
As well as dealing exporters another blow on top of U.S. tariffs, a stronger euro could lower imported prices further.
But de Guindos said the exchange rate had not been volatile, nor had its appreciation been rapid, two key metrics in his view.
“I think that, at $1.15, the euro’s exchange rate is not going to be a big obstacle,” said de Guindos, a former Spanish economy minister and the longest-serving ECB board member.
RESERVE CURRENCY?
De Guindos poured cold water on talk that the euro could soon challenge the dollar’s status as the world’s dominant currency.
The euro zone still lacked the necessary financial architecture or defence capabilities to become a real challenger and that is also going to limit its gains, another argument to counter fears over too low inflation.
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